Thank You

Error.

China has squirreled away nearly half the world's cotton, but its mills would rather eat off of someone else's plate.

The No. 1 cotton consumer began to auction off some of its estimated 42.6 million-bale stockpiles of cotton on Jan. 14, but domestic yarn and textile spinners have been less than enthusiastic. To date, mills have taken only a third of the cotton put up for auction by the China National Cotton Reserves Corp.

Instead, mills are turning to the international market to purchase the fiber they need, driving up demand for cotton from the U.S.—the No. 1 exporter. The rising demand should help send cotton prices on the ICE Futures U.S. exchange higher through the end of the current marketing year on July 31.

"There's poor cotton quality in China, which is driving demand from China to other markets," said John Payne, senior broker at Daniels Trading in Chicago. All the cotton Beijing has put up for auction thus far has been of below-average quality.

Chinese mills can get better-quality cotton abroad for roughly the same price as the fiber available on the domestic market, or in the state auctions.

On Friday, cotton for March delivery rose 0.1% for the week to 81.39 cents a pound. Prices are up 8.3% so far this year.

The Chinese government artificially inflates internal cotton prices in order to encourage farmers to plant the fiber. Imported cotton costs about 60% of what China's cotton fetches—but the prices are nearly even when taxes, import duties and shipping are factored in for international cotton.

"The reserve is just not going to put out the quality or the quantity the spinning mills really need, and certainly not at the price that they're looking for," said Chris Kramedjian, a risk-management consultant at INTL FCStone in Nashville. "For the short-term [the mills] are going to continue relying on imported cotton." Imported cotton tends to have longer fibers, which mills covet because it makes the fiber easier to spin and dye. And signs are pointing toward China importing more of the fiber.

In February, the U.S. Department of Agriculture estimated that China's total worldwide cotton imports would reach 14 million 480-pound bales in the current marketing year, a 12% increase from its previous forecast. Analysts at INTL FCStone expect the USDA to upwardly revise the import number over the next several months. U.S. cotton export sales to China are up nearly eightfold for the first six weeks of calendar 2013, compared with the previous year, according to data from the USDA.

PRICES WILL ALSO BE BUOYED by expectations that less cotton will be planted in the U.S. during the 2013-14 marketing year, which begins Aug. 1.

"Most farmers are going to go to soybeans and corn" instead of cotton, Payne said. Over the past year, soybeans have gained 17% and corn has risen 11%, while cotton prices have fallen 8%.

Competition from other row crops is expected to help push U.S. cotton plantings to their lowest level since 1983, down 27% from 2012, according to estimates from the National Cotton Council, an industry group.

With Chinese appetite seen as a constant and smaller supply on the horizon, investors could find themselves in high cotton.